Preventing procurement fraud
in higher education
April 3, 2014
© Baker Tilly Virchow Krause, LLP
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Objectives
> Illustrate the risks associated with the contracting process
> Define the parameters of fraud versus human error and mistakes
> Highlight examples of best practices in contract administration
> Identify strategies and internal controls to reduce procurement risk
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Contents/Agenda
> Overview: Why fraud occurs
> Types of procurement fraud
> How colleges and universities can fall short
> Detecting procurement fraud
> Fraud investigation considerations
> Strategies for preventing procurement fraud
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Overview: Why fraud occurs
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Fraud
> Fraud /frôd/
Wrongful or criminal deception intended to result in
financial or personal gain. A person or thing intended to
deceive others, typically by unjustifiably claiming or being
credited with accomplishments or qualities.
Synonyms
- Swindle – Trickery – Deception – Scam - Cheat
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Why people commit fraud
Pressure
• Political pressure.
• They were asked to perform a small “favor” this one-time.
• Financial stress (e.g., high medical bills, gambling addiction).
• Desire to advance in their career.
Opportunity
• Individuals think no one is watching.
• They got away with it once, so why not do it again.
• Perceived understanding of how to “beat” the system.
• Weaknesses in internal controls.
Rationalization
• Individuals believe they are justified in their actions and can repay
the money before anyone notices.
• Belief they are underpaid and the action is justified.
• Family obligations.
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Source: Fraud Triangle, Donald R. Cressey
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Types of procurement fraud
adapted from the Uniform Occupational Fraud
Classification System
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Source: Association of Certified Fraud Examiners
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Types of procurement fraud: Corruption
Bid
Rigging
Bribery
• The agreement of multiple bidders to manipulate the procurement process.
• Bidders agree to rotate bidding, bid high prices, or participate in anticompetitive practices.
• Vendors provide kickbacks to purchasers and authority makers in exchange for contracts.
• The bribe can be monetary, tickets to sporting events or work on personal property.
• A person with a fiduciary responsibility to the institution exploits their position for personal benefit.
• An example is a Project Manager for the installation of a new soccer field who fails to disclose
Conflicts that he has partial ownership in the selected firm completing the work.
of
Interest
P-Card
Misuse
• Employees use their P-Card to purchase personal items.
• Employees purchase restricted items e.g. alcohol.
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Types of procurement fraud : Corruption continued
Phantom
Vendors
Splitting
• Fictitious vendors are established as reputable firms.
• Payments are made to these vendors even though work was never
performed.
• In order to avoid the threshold for competitively procuring goods and
services, the request is split into small purchases.
• The cumulative amount of the purchase order is well over the bid
threshold.
• Suppliers submit substitute items without prior approval of the requestor.
• The substitute items are inferior to the specifications and can either be of
lesser cost or lesser quality. However, the institution is billed at the higher
Substitution
price.
of Items
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Types of procurement fraud : Asset misappropriation
• Suppliers intentionally ship an
incomplete order, but the receiving slip
states that a full order was delivered.
Asset
Misappropriation
• Employees steal inventory.
• Good inventory is marked as scrap so
that it can be discarded and then
resold.
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Types of procurement fraud : Fraudulent statements
Fictitious
Revenues
• Firms overstate their financial revenues to appear more financially solvent
than they really are.
• Institutions believe that the firm is in good financial health, but the firm may
be on the brink of bankruptcy or not in a position to complete the work.
• Firms fail to disclose their full ownership structure, which may lead to doing
business with debarred or decertified firms.
Improper • Firms fail to state any current or legal issues that may impact the award of
their contract.
Disclosures
• Firms provided inflated qualifications of their company and staff performing
the work.
Overstated • They may overstate their success rate with past projects or experience
performing comparable projects.
Credentials
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Polling Question #1
Which type of procurement fraud has had the most impact on your
institution?
A.
B.
C.
D.
E.
F.
G.
Collusion/bid rigging
Splitting transactions to remain below the competitive bid limit
Substitution of items by suppliers without prior approval
Purchase card misuse
Submittal of false documents by vendors and/or employees
All of the above
None of the above
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How colleges and universities can fall short
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Weaknesses in the procurement process
> Decentralized procurement function
> Lack of segregation of duties
> Maverick or after-the-fact purchases
> Lack of a three-way match process
> Failure to have a formal procurement policy
> Lack of cross-training for staff
> Lack of an internal audit function
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Detecting fraud
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What to look for
Internal Signs
> Purchase orders created after hours (e.g., weekends, evenings,
holidays)
> An initial low bid is awarded, followed by multiple change orders
> Minimal documentation for procurement requests submitted
> A losing bidder is hired by the winning bidder, which may suggest
that the winning bidder did not have the qualifications to perform the
work
> Close social relationships between suppliers and college and
university personnel (e.g., gifts, trips, tickets)
External Signs
> The ownership structure is the same for multiple firms
> Companies who share offices with other suppliers that do business
with your institution
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Fraud investigation considerations
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Establishing a fraud incident plan
Establish a fraud incident plan to outline how the investigation will
be conducted and the necessary resources.
Approach
•
•
•
•
•
Create an investigation
plan
Maintain communication
with the investigation team
Take corrective action as
soon as possible
Have a debriefing meeting
after the investigation
Develop a public relations
strategy
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Considerations
•
Internal and external
resources
•
Applicable state statues
and laws
•
Investigation budget
•
Timeline for completion
•
Reporting requirements
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Steps in a typical investigation
Step
Action
1. Notify the right people
•
•
•
•
Notify HR for personnel matters
Legal department for advice and representation
Department and institutional leadership
Do not include anyone what may have a conflict of
interest with the investigation
2. Designate a lead investigator
•
•
Head of Internal Audit
Outside investigator
3. Suspend service
•
Determine if services may continue during the
investigation
4. Collect the evidence
•
Secure any evidence relating to the vendor, including
contracts, invoices, formal correspondence and goods
provided
Collect any emails and voice mails
Preserve and log legal documentation and establish chain
of custody
•
•
5. Perform interviews
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•
•
•
Develop an interview plan
Interview appropriate parties as soon as possible
Determine if interviews should be recorded
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Questions to ask
> Were the actions deliberate and intentional?
> Was the offense committed by one or more individuals?
> At what stage in the procurement process did the fraud
occur?
> Was fictitious paperwork created?
> Was the contract established to facilitate fraud?
> Are there protocols in place that should have caught the
fraud?
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Reporting the results
Once the investigation is complete, report the results as quickly
as possible. Potential considerations include:
> Issuing a final report that details the findings and results.
> Updating/implementing all applicable policies and procedures
to address weakness in internal controls.
> Sharing any key take-aways to prevent future fraud through
staff development and training.
> Determining if any disciplinary action should be taken or if the
case should be referred to law enforcement as a criminal
matter.
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Polling question #2
Which is a consideration for a fraud management plan?
A. Including all parties that were involved in the incident throughout
the process.
B. Establishing an unlimited budget.
C. Determining if external resources are necessary.
D. All of the above.
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Strategies for preventing procurement fraud
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Competencies for contract managers
Technical
Competencies
Aligned Skills
Perform Requirements Planning
•
•
•
Determine appropriate procurement method
Write detailed requirements/scope of work
Create an appropriate cost structure
Effectively Communicate with
Bidders
•
•
Lead pre-bid/pre-proposal conferences
Respond to bidder inquiries via a formal addendum
Perform Technical Analysis of
Proposals
•
Evaluate bidder responsiveness to the requirements and nonprice factors
Evaluate pricing proposals
Perform bidder due diligence e.g., background checks and site
visits
•
•
Perform Negotiations
•
•
Lead negotiations
Conduct discussions with bidders to determine their capacity
and qualifications
Manage Vendor Performance
•
•
Inspection and acceptance of goods and services
Contract monitoring to ensure work performed is in compliance
with contract terms
Hold regular meetings to review vendor performance
•
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Contract management strategies
> Develop detailed specifications and/or scope of services
•
•
Clearly state the “Who, What, When, Why, Where and How” the services are to
be provided.
Include deliverable due dates, special qualifications/licenses needed, and how
the final product will be provided to the institution.
> Conduct research and background checks on bidders before they are
awarded a contract
•
•
Use web-based searches and disclosure statements to research vendors (e.g.,
Google, LexisNexis, and Secretary of State business search)
Conduct searches on current and past directorship and consider extending the
searches two levels down to look for common links.
> Perform announced and unannounced site visits
•
•
Determine if the vendor has appropriate inventory and supplies for the business
they are in.
Interview the owner to understand how involved they are in the daily operations
of the business.
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Contract management strategies (continued)
> Include pertinent clauses in contractual documents
•
•
Stipulate language that details minimum performance standards, dispute
resolution steps, and penalties for failure to meet performance expectations.
Sample clauses include right to audit, substitutions, compliance with all laws and
termination for cause/convenience.
> Include performance indicators in contracts and evaluate vendors on
them
•
•
Establish the frequency for evaluating performance indicators within the contract.
Make the indicators specific and measurable.
> Maintain segregation of duties and internal controls
•
•
The person who approves the purchase should not be the person who makes the
purchase request.
Automate the procurement process so that there is an audit trail.
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Centralized versus decentralized procurement
Centralized model
Decentralized model
Dispersed procurement
authority
All
decision
making
authority
Oversight
Sets policy
Centralized
procurement
Maintains
vendor
contact
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Individual units issue POs
No single point of oversight
Issues POs
Policy responsibility
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Procurement analytics
Procurement systems can provide reports that can be used to
monitor purchases for fraud and abuse.
P-Cards
•
•
•
•
•
•
Split transactions
Over limit transactions
Even dollar amounts
Purchases made during
non-office hours
Multiple purchases to one
vendor
Account credits and
declines
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POs and Contracts
•
•
•
•
•
•
Unauthorized approvals
Payments made within a
week
Similar invoices
Purchase orders made
during non-office hours
Multiple purchase orders
to the same vendor
Even dollar amounts
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Ethical behaviors
Conflicts of Interest
• Avoid the appearance of impropriety.
• Avoid professional or personal activity that would create a conflict of
interest.
• Shelter the procurement process from political influence.
Conduct with Suppliers
• Refrain from showing favoritism to suppliers.
• Refrain from asking suppliers to provide donations or sponsorships.
• Treat all suppliers the same.
Best Practices
• Maintain a Corporate Responsibility Policy
• Promote a fair and transparent policy (e.g., require competition and
post awards online)
• Limit or prohibit gifts and meals with suppliers
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Characteristics of a strong procurement function
Support from institutional leadership
Establish clear policies and procedures.
Communicate that fraud will not be
tolerated.
Whistleblower program
Anonymous hotline
No retaliation
Constant monitoring
Be diligent – frequent and by
surprise
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Cross- train employees
Trending analysis
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Polling question #3
Which is not a strategy for preventing procurement fraud?
A. Train staff on ethical practices
B. Develop contracts that have a clear scope of services and relevant
contractual clauses.
C. Refrain from communicating with vendors during the bidding
process
D. Cross-train all staff to understand how internal systems work
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Resources
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Resources
> Association of Certified Fraud Examiners, Fraud Tree:
https://acfe.com/fraud-tree.aspx/
> National Association of Educational Procurement website:
http://www.naepnet.org
> National Institute for Governmental Procurement website:
http://www.nigp.org
> The Institute for Internal Auditors website:
https://na.theiia.org/
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Baker Tilly refers to Baker Tilly Virchow Krause, LLP, an independently owned
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Krause, LLP.
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